2 Week (Tuesday, 8/23/2011)
Complete Chapter 2
Thursday Begin Chapter 3
End of Chapter Problems:
5, 7, 9, 11
Key Items from Last Week
Autarky prices
The region underneath a supply
curve
Consumer Surplus
area -Price
benefit
Triangular
Net
after
subtracting
Po
Qo
units
cost of
Effect of Price Reduction
Triangular
area -P
Po
expands
Po
z+y
consumer
surplus -area z
area y
by area
Producer Surplus
P
P
Surplus =
revenue
S
Producer
a
total
total cost =
area a
X
Impact of Price Fall
P
Producer
P
P
P)(Q-Q)
S
f
g
Loss of
Surplus =
(P-P) Q +
(P-
The Home Market
Numerical Example
Effects of Price Reduction
from $2,000 to $1,000
Change in Consumer Surplus
= (Area t ) + (Area d)
= [($2,000 - $1,000) 40]
+ [1/2 ($2,000 - $1,000)(65
40)]
= $40,000 + $12,500
= $52,500 or $52.5 million
Effects of Price Reduction
from $2,000 to $1,000
Loss in Producer Surplus
= (Area w ) + (Area v)
= [($2,000 - $1,000) 15]
+ [1/2 ($2,000 - $1,000)(40
15)]
= $15,000 + $12,500
= $27,500 or $27.5 million
Autarky Equilibrium
Two Different Countries
AUTARKY (Before Trade)
Price
SF
Price
S
PD
D
DF
PF
Derive Import Demand Curve
Price
2000 .
1000
0
Q
50
Derive Import Demand Curve
Price
2000 .
1000
0
Q
50
Derive Export Supply Curve
Rest of the World
Price
Price
Price
1000
1000
1000
700
700 .
700
0
25 50
Q
50
50
Derive Export Supply Curve
Rest of the World
Price
Price
Price
1000
Sf
1000
1000
700
700
Df
700 .
0
50
Key Questions 1st Part of
Course
1. Why do countries trade?
2. What determines the pattern (or
composition) of trade?
3. What are the effects of trade on each
countrys economic structure?
Production, Consumption.
4. For each country, what are the overall
gains (or losses) from What trade?
5. are the effects of trade on the
distribution of income within each
country? Winners, Losers.
Effects of Opening Up to Trade
At home (importing nation)
Price falls, QD rises, QS falls
the difference QD-QS met by
imports
Abroad (exporting region)
Price rises, QD falls, QS rises
the difference QS-QD is exported
Impact on Home Economic Wellbeing
Consumers
Gain areas a + b + d
Producers
Lose area a
NATION AS A WHOLE
Gains area b + d, otherwise known as
Gains from Trade
Impact on ROW Economic Wellbeing
Consumers
Lose areas j + k
Producers
Gain areas j + k + n
NATION AS A WHOLE
Gains area n, otherwise known as Gains from
Trade
Which Country Gains More?
Gain for U.S.
Area b+d = (Change in Internal Price)
(Imports)
Gain for ROW
Area n = (Change in Internal Price)
(Exports)
Divide the two:
Gain for U.S.
(Change in Internal
Price)
---------------=
---------------------------------
A Numerical Application
You are given the following equations:
Demand: P = 291 40 Qd
Supply:
P = 0.5 + 35 Qs
How do you compute autarky price?
How do you determine autarky Qd?
How do you determine autarky Qs?
A Numerical Application
IN autarky, Qd = Qs.
Rewrite Demand:
(1/40) P
Rewrite Supply:
P(1/35)
Qd = (291/40)
Qs = -(.5/35) +
Set the two equations equal and solve for P
(291/40) (1/40) P = -(.5/35) + P(1/35)
P =?
How would you obtain Qs and Qd in autarky?
A Numerical Application
Suppose the country is now trading freely and the
world price of the product is P = $67
What is QD and QS under free trade?
Is the nation an exporter or importer of this
product?
What is the quantity imported or exported?
How would you calculate the Gains from Trade?
For Thursday, Start
Reading Chapter 3